Tax planning: How to stop clients leaving it so late

But in this busy world, too often this is turned on its head and most people seem to live by the adage: 'Why do today what we can put off until tomorrow?'.

No more clearly is this seen than in the end-of-tax-year rush that advisers, accountants, investment managers and financial officers have to endure as people leave it until the very last minute to get their tax planning sorted for the 5 April.

For Mark Brownridge, director general of the EIS Association, the 5 April each year presents a "natural" deadline and people naturally gravitate towards that deadline, rather than work well in advance of it.

He comments: "This means, despite our best intentions, we prioritise other jobs over and above our end-of-tax-year planning, because we know we have a fallback position of 5th April which acts as a deadline of last resorts."

Clients can boost their returns substantially, simply by investing at the beginning of the tax year. Rachael Griffin

James Nield, investment manager at Thesis Asset Management, states: "This deadline/brinkmanship mentality makes for a great marketing opportunity for many financial services businesses.

"This explains the flurry of advertising that we see at that time of year."

Human nature, then, plays a big part in people's lack of forward planning, or, as Richard Hoskins, co-founder of Kin Capital so succinctly puts it: "The crocodile nearest the canoe is rarely the end of the tax year".

This means the "tax year end comes to bite" for advisers, who, as Tim Morris, an IFA at Russell & Co Financial Advisers says, generally have good clients but "sadly not all" are in the "good habit" of investing their Isa and pension allowances early in the tax year. 

Cue late nights in the office, eating Ramen or Dominos for the last week of March and beginning of April, and forgetting what your children's names are. 

But aside from human behaviour and keeping other crocodiles at bay, what genuine reasons might there be for clients leaving it so late?

Self-employed and bonus-driven investors

There are some clients whose lives and employment means they cannot really plan their finances until the end of the tax year.

There are, according to latest figures from the Office for National Statistics (ONS), approximately 4.6m people in the UK registered as self-employed or working in the so-called 'gig economy' and this figure is set to rise.

Mr Brownridge explains: "For many self-employed people, it is difficult to plan until the tax year end, because it isn't until then you have a better idea of what you have earned over the year, and can then commit the necessary sums to your tax planning."

Tracyann Kneen, product technical manager for Nucleus, concedes that early tax planning is "easier for those who receive regular flows of income and capital".

"Some individuals may not have a clear idea of the level of income they'll receive until close to the tax year end," she adds.

The crocodile nearest the canoe is rarely the end of the tax year. Richard Hoskins

A lot of the reason for the delay depends on what sort of job one's clients have. For example, in retail, a lot of bonuses might be paid out at the calendar or financial year end, which does not always coincide with the tax year end.

Mr Morris comments: "The majority of my clients who work in financial services receive their bonuses in March. Even if they know they are expecting it, it means they end up investing towards the end of the tax year."

"Clients naturally want as much visibility on their earnings as possible in the relevant tax year, to ensure earnings-related tax planning is optimised," says Daniel Rodwell, managing director for Growth Invest.

"Where non-salaried income is a large part of a client's total compensation, this naturally focuses tax planning demand into the last few months before the tax year end.

"Whether this be visibility on dividends after financial year ends for company directors, or the traditional bonus season across financial services, clients can be forgiven for wanting clarity on what tax they are paying before they plan their investments," Mr Rodwell continues.

But while a bonus is never guaranteed, there should be some element of reasonable expectation that either allows a person to set plans to invest in motion before the money comes in, or else take advantage of the ability to use regular savings plans and drip-feed a bonus and income into an Isa or similar arrangement throughout the year.

Mr Hoskins is of this view: "Investors can be waiting on a particular windfall, such as a bonus or an inheritance, but it's often simply client inertia. 

"Advisers can help encourage clients to think of tax planning at the start of the tax year instead", he suggests, regardless of bonuses or anticipated windfalls.

This is particularly key if someone is planning to invest in an enterprise investment scheme (EIS), he says.

Mr Hoskins continues: "As a tax planning tool, this makes life a lot easier, too. For example, Parkwalk EIS fund has an up-to-12-month deployment period, so for investors subscribing to the fund in April 2018, they can have all their underlying investments made in the same tax year (2018 to 2019) and, if they choose, carried back to 2017 to 2018.

"Given the shift towards growth EIS funds, which take time to deploy capital, acting earlier is only going to become more important."

Business clients 

"My business clients whose financial year end matches with the tax year always go down to the wire," says Mr Morris. "Once again, their annual earnings are not clear until that time".

One accountant I know had a corporate client ring up on the deadline day itself this year and present a "mess" for him to sort out by tax year end. It came with a hefty charge, of course, as well as a migraine.

But instead of adding fees as a disincentive to leaving it to the last minute, Mr Hoskins also suggests rewarding good behaviour.

He says: "Advisers could reward the early birds by charging slightly lower, or discounting fees when business is written or tax returns are completed early."

Visibility and clarity

While Rachael Griffin, tax and financial planning expert for Old Mutual suspects "it's normally just procrastination that makes people wait til the last minute", she does concede there might be strategic reasons for leaving financial planning to the year end.

She explains: "For example, planning around capital gains tax (CGT) is usually a tax-year-end activity."

Mr Morris also points out the "added layer of complexity" of the tapered annual allowance for higher earners. He says this can cause an issue for clients who have an adjusted income annual allowance in excess of £150,000, necessitating a 'leave it until the last minute' attitude.

Planning left til later in the tax year often requires tax liabilities to be settled and then mitigated at some considerable time in the future. Ian Battersby

For Mr Nield, some clients in specific circumstances may want to 'double up' - for example, "make an Isa subscription on 5th April and a second on 6th April", while similar principles might apply in the pensions market, he says.

All these are understandable reasons, but as Ms Griffin asserts, in terms of maximising the potential gain for a client, it makes so much more sense for a client to invest as early as possible.

"Maximising the amount of time your client is invested for can make a notable difference to their investments," she says. "Clients can boost their returns substantially, simply by investing at the beginning of the tax year."

For Jack Rose, head of tax products for LightTower Partners, because most people do not know their tax positions until the first quarter, they won't necessarily consider making use of tax-efficient structures such as a venture capital trust (VCT) or enterprise investment scheme (EIS) until they have enough clarity.

He says: "This [lack of clarity] can present an issue, especially for EIS investors, because growth capital investment opportunities are evergreen, they are not tax year end driven.

"They are more organic than the structured ‘asset backed’ EIS products of old which could be structured around the tax year end."

Mr Rose advocates: "Potential investors need to think about it earlier in the year, especially if they are considering EIS for income tax relief in the previous tax year by using the carry-back facility with EIS. Put simply, if people don’t look at it earlier then they will potentially miss out on the best offers to investors that do consider these investments throughout the year."

Advantages of being an early bird

Most advised clients are doing things earlier, according to Ian Battersby, business development director for Seneca Partners.

He says while most income tax planning activity takes place in February and March each year, more and more advisers are "recognising that tax-advantaged investing is simply part of their overarching financial planning strategies for their clients, and becoming very much more an all-year-round consideration".

"From a cashflow viewpoint alone, planning done early in the year can offset tax which will become due, whereas planning left til later in the tax year often requires tax liabilities to be settled and then mitigated at some considerable time in the future," he notes.

Mr Brownridge adds: "By encouraging clients to invest in an enterprise investment scheme (EIS) at the beginning of the tax year, they will get their relief quicker, as the capital should be deployed fairly quickly."

Many EIS funds often offer "early bird" discounts to incentivise clients to invest early - and there is also the prospect of a client's chosen EIS fund closing early because it has reached capacity, meaning a client leaving it too late might have to go for their second or third choice.

Summary of suggestions

• Point out the investment return potential of investing earlier, rather than later.
• Explain the benefits of being able to receive their current year tax relief before the end of the year through payroll by applying to HMRC to change their PAYE code.
• Encourage clients three months in advance to start getting their paperwork in order.
• Make the most of tax-efficient products (such as EIS) that allow carry back, enabling clients to treat investments as being made within the preceding year.
• Reward good behaviour by discounting fees for business written or tax returns completed early.
• Consider the benefits of early relief repayment and getting your choice of EIS by being early to the investment party.
• Set up regular savings plans to help avoid last-minute rushes into Isa or Sipp arrangements.
• Get as much paperwork digitised as possible to help create more certainty around a potential tax bill.
• Help clients understand the cashflow viewpoint, whereby investing early in the year can often offset tax, whereas planning later in the year often requires tax liabilities to be settled and mitigated.

Changes afoot

HM Revenue & Customs is embarking on its Making Tax Digital (MTD) programme, which Dawn Register, tax partner at BDO, believes is the "most significant change to tax since the introduction of self-assessment and fundamentally change the administration of the tax system".

Because UK taxation is subject to approximately 20,000 pages of legislation, it has not been an easy task for HMRC to distill all this into simple, online checklists. 

However, Ms Register says the soft launch of MTD for income tax for the self-employed, which came into being on 5 April this year, is a great step forward in helping to make tax simpler for the 10m people who are filing personal tax returns online.

As MTD is rolled out, it should spur more people to take greater responsibility for their tax affairs, and might even make people feel more in control of their whole financial position.

Hopefully, this sense of control over one's personal finances, and better awareness of taxation, might lead to fewer last minute tax returns on 31 January and fewer last-minute tax-year-end investments in the future.

simoney.kyriakou@ft.com